Bay Petroleum Corporation v. Corporation Commission

36 F. Supp. 66, 1940 U.S. Dist. LEXIS 2220

• Court: District Court, D. Kansas
• Decided: November 13, 1940
• Docket: Civil 1861
• Status: Published

Opinions

BRATTON, Circuit Judge.

This is a suit instituted by Bay Petroleum Corporation, hereinafter called Bay, and Dudley D. Morgan, Olney F. Flynn and Russell Cobb, hereinafter called Morgan, Flynn and Cobb, against the Corporation Commission of the State of Kansas, hereinafter called the commission, the members of the commission, and the director of the conservation division of the commission, to enjoin the defendants from enforcing certain provisions of chapter 227, Laws of Kansas 1939, and a certain order already entered by the commission, as well as like orders which may be subsequently entered, relating to the production of crude oil and the proration thereof among producers.

Chapter 227, supra, concerns itself with the production of crude oil, and confers certain powers upon the commission in respect thereto. Section 1 defines the term “waste” to include, in addition to its ordinary meaning, economic waste, underground waste, surface waste, waste of reservoir energy, and the production of crude oil in excess of transportation or marketing facilities or reasonable market demands; and it confers authority upon the commission to make rules and regulations for the .prevention of such waste. After dealing with the manner in which persons shall produce from a common pool, and authorizing the commission to regulate such taking in a manner which will prevent waste, or independently of waste, will prevent the inequitable or unfair taking as well as unreasonable discrimination, section 2 provides, among other things, that the commission is further authorized, and it shall be its duty, to prevent unreasonable discrimination in favor of any one pool as against any other pool or pools in the allocation of allowable production among such pools; and it further provides that nothing contained in the section or in the act shall authorize the reduction or limitation of full production from any pool whose average well-size is fifteen barrels per day or less. Section 3 provides that the commission shall determine the reasonable market demand for crude oil produced in the state, and shall allocate among the pools the amount which may be produced therein without waste, impairment of correlative rights and unreasonable discrimination between pools; and it delimits the manner in which the determination of the reasonable market demand shall be made. It further provides that in making such allocation among pools, the commission shall take into consideration, among other proper factors, and shall give due weight to the prevention of waste in any pool, the quantity of oil that will be produced from non-prorated pools, and the ratio of the daily productive capacity of each prorated pool to the total daily productive capacity of all prorated' pools, after adjustment of such daily productive capacities of such pools has been made in such manner that' the ratio will result in an approximately fair and equitable allocation of the production among such pools. It further provides that the commission shall have jurisdiction and authority over all matters involving the application and enforcement of the act. And, in addition, it provides that nothing contained therein is intended to vest the commission with authority to fix the price of crude oil. The act contains other provisions, but they are without application to the questions in hand.

Crude oil was first discovered in Kansas more than fifty years ago. For several years immediately preceding the enactment of the statute here challenged, the daily potential capacity to produce far exceeded market demands. In January, 1934, the potential productive capacity was more than 300,000 barrels, while the demand was slightly more than 100,000 barrels; in January, 1935, it was approximately 397,000 and 141,000 barrels, respectively; in January, 1936, it was approximately 838,000 and 138,000 barrels, respectively; in January, 1937, it was approximately 1,667,000 and 175,000 barrels, respectively; in January, 1938, it was approximately 3,069,000 and 186,000 barrels, respectively; and in 1940 (after enactment of the statute) the productive capacity reached the enormous amount of approximately 5,000,000 barrels. There were and are a great many flush or semi-flush wells, and there were and are a large number of so-called stripper wells, meaning wells having a daily productive capacity of fifteen barrels or less. Oil can be produced in flush or semi-flush wells at less cost than in stripper wells. Stripper wells cannot compete with flush or semi-flush wells in production cost. Prior to proration, there was surplus production, and reservoir energy was expended at an excessive speed. The surplus oil was stored; losses were sustained through leakage, evaporation and oxidation; and fire hazards and other mishaps were present. These conditions brought gross waste, and contributed to instability in the industry. Without some regulation and control, these conditions would have continued and would now exist, instability in the industry would have continued and would now be present, the producers from flush and semi-flush wells would have progressively monopolized the markets, the owners and producers from stripper wells, unable to meet the competition, would have been and would now be compelled to prematurely abandon their wells, tremendous volumes of oil would have been and would now be irrecoverably lost in underground reservoirs, physical and economic waste would have been and would now be sustained, and the welfare of the state would have suffered and would now suffer.

Morgan, Flynn and Cobb own and operate certain oil and gas wells in the Otis pool, and are engaged in the business of producing oil from such wells and selling it. Bay owns a small refinery at McPherson, about seventy miles distant from the Otis pool. It is the only purchaser buying oil produced in the pool, and the oil so purchased is shipped by tank car to the refinery. Bay agreed to buy, and Morgan, Flynn and Cobb, and other producers, agreed to sell on terms mutually satisfactory, oil produced in the pool to meet the market requirements of Bay. The contracts fixed a sliding scale price of the oil based upon the price of gasoline, but a sufficient margin was provided to cover the cost of transporting the crude oil to the refinery and the cost of processing it, and to enable Bay to meet competition in the gasoline market. Pri- or to the execution of such contracts, Bay had purchased and refined crude oil at a loss.

The commission entered orders fixing allowed production and making allocations of allowables for the months of May, June, July, August and September, 1939. Bay was willing at all times to purchase 2,000 barrels daily from the Otis pool, and the producers were ready, able and willing to produce and sell that amount to Bay upon terms mutually satisfactory p and that amount could have been and can now be produced without waste ratably among the wells within the pool. Bay will desire to purchase and will nominate 2,000 barrels per day from such pool during the ensuing year, and Morgan, Flynn and Cobb can and will desire to produce and sell such amount to Bay at mutually satisfactory prices. Each of the several orders reduced the allowed production in the pool to a volume below that amount. But the total amount which Bay desired to purchase was added in with the nominations of other purchasers and considered in ascertaining the total market demand, and thereafter production was allocated among the several pools in the state in amounts sufficient to satisfy the predetermined market demand. At the time this suit was filed, Bay had on hand only about a two days’ supply of crude oil for the operation of its refinery, and at the time of the hearing, it had on hand about a seven days’ supply. Sixty days’ supply is not unreasonable. But Bay could purchase crude from others than Morgan, Flynn and Cobb for the operation of the refinery, although the cost would doubtless be greater and Bay would sustain a substantial loss.

The complaint is in conventional form. The statute, the orders of the commission, and other like orders which may later be made for subsequent months, are attacked on the ground that, as applied to plaintiffs, they violate the due process and equal protection clauses of the Constitution of the United States. The District Judge granted a temporary restraining order pending a hearing on the application for temporary injunction. After certain postponements by agreement of the parties, the case was submitted to this court, specially convened in accordance with section 266 of the Judicial Code, as amended, 28 U.S.C.A. § 380, on the question whether a temporary injunction shall be granted, being submitted on admissions contained in the pleadings, stipulated facts, ex parte affidavits and oral testimony; and oral arguments were presented and briefs were filed.

Plaintiffs urge that the temporary injunction should be granted for the reason that the ultimate question to be determined is whether the police power of the state extends to the point of denying to a producer of oil the right to produce and sell, and the purchaser the right to purchase, on terms mutually agreeable, where there is neither waste nor impairment of correlative rights within the pool from which the oil is produced; that such question is grave under the Constitution of the United States; and that the injury to plaintiffs will be certain and irreparable if the application is denied and the final decree be in their favor, while if the injunction be granted the injury to the defendants, even if the final decree be in their favor, will be inconsiderable, or may be adequately indemnified by bond. It is well settled that ordinarily a temporary injunction should be granted in a suit of this kind if the questions presented are grave and difficult, and the injury to the moving parties will be certain, substantial and irreparable if it is denied and the final determination be in their favor, while if it is granted and the decision is otherwise the inconvenience and loss to the opposite parties will be inconsiderable or may be adequately protected by a bond. Ohio Oil Co. v. Conway, 279 U.S. 813, 49 S.Ct. 256, 73 L.Ed. 972; Love v. Atchison, Topeka & Santa Fe R. Co., 8 Cir., 185 F. 321, certiorari denied 220 U.S. 618, 31 S.Ct. 721, 55 L.Ed. 612; Allen W. Hinkel Dry Goods Co. v. Wichison Industrial Gas Co., 10 Cir., 64 F.2d 881; Pratt v. Stout, 8 Cir., 85 F.2d 172. But it is equally well settled that a court of equity should exert its authority to issue the writ with deliberation and sound discretion; that it should not issue unless the right is reasonably apparent; and that it will not issue where it is sought merely for the purpose of delay in the enforcement of a statute or administrative order promulgated under it. See, Truly v. Wanzer, 5 How. 141, 12 L.Ed. 88; Borg v. International Silver Co., 2 Cir., 11 F.2d 147. The primary and decisive question involved here is whether the statute, and the orders of the commission entered under and pursuant to its provisions, violate due process and equal protection. That question is not to be encumbered with subsidiary contentions of incidental and indecisive importance. In the exercise of our discretion, we think the determination of the question should not be postponed and the state enjoined in the meantime from enforcing the statute.

It is well settled that the state, in the exertion of its police power, may legislate to prevent physical or economic waste in the production of oil and gas, and to protect the correlative rights of producers from a common pool. The constitutional validity of statutes designed to attain these ends has been repeatedly sustained. Ohio Oil Co. v. Indiana, 177 U.S. 190, 20 S.Ct. 576, 44 L.Ed. 729; Bandini Petroleum Co. v. Superior Court, 284 U.S. 8, 52 S.Ct. 103, 76 L.Ed. 136, 78 A.L.R. 826; Champlin Refining Co. v. Corporation Commission, 286 U.S. 210, 52 S.Ct. 559, 76 L.Ed. 1062, 86 A.L.R. 403; Railroad Commission v. Rowan & Nichols Oil Co., 310 U.S. 573, 60 S.Ct. 1021, 84 L.Ed. 1368. See, also, Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 31 S.Ct. 337, 55 L.Ed. 369, Ann.Cas. 1912C, 160; Oklahoma v. Kansas Natural Gas Co., 221 U.S. 229, 31 S.Ct. 564, 55 L.Ed. 716, 35 L.R.A.,N.S., 1193; Sterling v. Constantin, 287 U.S. 378, 53 S.Ct. 190, 77 L.Ed. 375; Thompson v. Consolidated Gas Utilities Corporation, 300 U.S. 55, 57 S.Ct. 364, 81 L.Ed. 510.

And a state is free to exercise a wide scope of discretion in the selection of methods or means of reaching such permitted objectives. Whether the statute is wise, or based upon sound economic theory, or is the best means of preventing physical or economic was,te, or of protecting the correlative rights of producers of oil, rested exclusively with the legislature and is of no concern to the court, if the means selected have a real and substantial relation to the objects sought to be attained, and are not unreasonable, arbitrary or capricious. We are not free to substitute our judgment for that of the legislature in respect of the reasonableness, wisdom or propriety of the legislation. The sole question within the range of judicial inquiry is whether the statute and the orders entered under it transcend constitutional limitations. McLean v. Arkansas, 211 U.S. 539, 29 S.Ct. 206, 53 L.Ed. 315; Chicago, B. & Q. R. Co. v. McGuire, 219 U.S. 549, 569, 31 S.Ct. 259, 55 L.Ed. 328; Standard Oil Co. v. Marysville, 279 U.S. 582, 49 S.Ct. 430, 73 L.Ed. 856; Nebbia v. New York, 291 U.S. 502, 525, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469; Railroad Commission v. Rowan & Nichols Oil Co., supra.

The purpose of this statute is the prevention of waste of a natural resource, and the protection of the correlative rights of producers. In order to be a valid enactment, it must have a real and substantial relation to the objects sought to be attained, and it must not be unreasonable, arbitrary or capricious, Nebbia v. New York, supra; Thompson v. Consolidated Gas Utilities Corp. supra.

It is the contention of plaintiffs that the statute and orders, in their application to plaintiffs, do not have such a relation to the prevention of waste, or the correlative rights of producers, for the reason that the amount of oil which it is sought to produce in the Otis pool can be produced without physical waste. But the contention rests upon the postulate that in determining whether that amount can be produced without waste, the Otis pool must be considered separate, apart and distinct from the balance of the state. As previously stated, grossly wasteful practices were occurring, and as a result the industry was instable. The producers from flush and semi-flush wells were monopolizing the markets, the producers from stripper wells were faced with the necessity of premature abandonment of such wells, and thus enormous quantities of oil would be lost and stupendous waste sustained. That was the condition which existed respecting a natural resource and an industry having to do with it. The state was not completely impotent to deal in any manner with those conditions which were inimical to its welfare. Due process and equal protection did not restrict the legislature to silence and inaction respecting gross waste of a natural resource of such magnitude and importance, or the resulting instability of the oil industry. And, within permitted bounds of constitutional limitations, the legislature was free to make its own choice as to corrective and preventive methods. Of course, need for correction, however immediate and urgent, can never constitute a sustainable basis for legislative action in excess of constitutional limitations; but within such limitations, a state may exercise its own choice of methods and means, provided they have a real and substantial relation to the ends sought to be attained, and are not arbitrary. And once that choice has been exercised, courts are not free to overturn it. Without fullness of elaboration, we fail to find anything in the letter or spirit of constitutional limitations which requires the state in fixing criteria for the conservation of the crude oil industry, in preventing physical and economic waste, in protecting the correlative rights of producers, and in promoting economic stability, tp consider each prorated pool separate, apart and distinct from others in determining whether a specified quantity of crude oil can be produced without waste ratably among the wells within such pool. We think the state may in its effort to attain these objectives consider the oil industry of the state as a whole, restrict allowed production to predetermined market demands, prorate the allowed production among the several pools in the manner authorized by the statute, and forbid production in a given pool in excess of the amounts thus allowed, even though a larger amount may be produced without physical waste in that particular pool. If excess production is allowed in one prorated pool, even without physical waste there, total production will exceed total market demands, and that condition contributes to physical and economic waste as well as industrial instability. It thus seems reasonably clear that the provisions in the statute and the orders of the commission, under and through which production in the Otis pool is being restricted to an amount allocated thereto in accordance with the statute, bear a real and substantial relation to the prevention of physical and economic waste of the oil industry in the state, even though the quantity which it is desired to produce can be produced without actual physical waste in that particular pool, considered separate, apart and distinct from other pools.

Plaintiffs place strong reliance upon Thompson v. Consolidated Gas Utilities Corp., supra, but that case is substantially different in decisive respects. There plaintiffs owned gas wells in the Panhandle field in Texas, and they also owned pipe lines from the field to several large cities throughout the country. Gas could not be stored, and there was no local market for it. To utilize the sweet gas, it was necessary that it be delivered to the ultimate consumer by pipe lines in a' continuous flow from the well to the burner tips. Plaintiffs had an adequate supply of gas in their own wells for their market demands, they had no economic occasion to buy gas from wells owned by others, and their operations were conducted prudently and without waste of gas. The court held that the real purpose of the statute and the order promulgated under it, limiting production from wells within the field, was to compel plaintiffs to buy gas from owners of wells in the field with no pipe line or other outlet facilities with which to fulfill their contractual commitments, and that such purpose had no substantial relation to the prevention of waste. Here the essential purpose and object of the statute and the order of the commission is to prevent physical and economic waste. Without taking up seriatim other cases relied upon, it may be said in summary that they are similarly distinguishable.

For the reasons indicated, the temporary restraining order will be vacated and set aside, and the prayer for a temporary injunction will be denied.